Forex traders need certain tools to make successful trades. These tools keep them up to date about current events in the forex market that can affect their trades, help protect their funds from risks, and can present an opportunity for them to increase their lot position when trading. Some of these tools are necessary for making profitable trades because they give traders an idea of the bigger picture of the market and help to accurately predict the movement of currency pairs. One of these tools is the forex chart.
Having forex charts and knowing how to read them is an important tool in any trader’s arsenal, whether experienced or amateur because it provides clearer and more detailed information about the market than most trading tools. Here’s how you can read a forex line chart.
What are Forex Charts?
For traders who enjoy making use of technical analysis to determine their trading strategies, forex charts are important. A forex chart is a price chart that helps a trader to get the historical data of a currency pair to determine its future price movements, especially when combined with other tools for technical analysis. It is a visual representation of the movement of a currency pair over a specific period of time, so any asset that has price data can have a chart formed for analysis purposes.
Most forex trading platforms provide different types of forex trading charts for clients who have accounts with them, along with other technical indicators like moving averages, relative strength index, and Bollinger Bands.
Types of Forex Charts
Some trading platforms may allow you to use various types of forex charts, and it is important to know that there are three main types of charts:
The first is the forex line chart, and it shows the different closing prices of the currency pairs. It indicates the different closing price points of an asset, and these different points are connected to form a continuous line.
Line charts are the simplest charts to read, and they are good for identifying trends or seeing ‘the bigger picture. However, since it only shows the different closing prices, it does not provide much detail about the behavior of the currency pair within that given period.
The second major chart is the bar chart, and as the name implies, it uses bars to show the opening and closing prices of a currency pair as well as the highs and lows. Unlike the line chart, this type of chart gives traders an idea of the price behavior within a specific time period.
Typically, the top and bottom points of the bar represent the highest and lowest prices for a given asset within a period, while the short vertical line on both the left and right side of the bar represents the opening and closing price of the asset, respectively.
Since each bar represents the price range and behavior in a certain period, these bars may differ from one another in size. For instance, when the asset becomes more volatile due to price fluctuations, the bars will increase in size, and when there are fewer fluctuations, the bars will be smaller; this can help a trader in understanding the volatility of an asset and determine what trading strategy would be best. Plus, it is important to remember that each bar, depending on the time period you are checking, may represent a day, week, or hour.
Candlestick charts are another type of chart commonly used by forex traders, and it is a slight variation of the bar chart. Candlestick charts provide a more visual representation of the price movement of a currency pair, and they are excellent for traders who are just learning about chart analysis. They are also useful in identifying trend reversals in determining which direction the market is going to go.
Each candlestick shows four different prices of an asset within a specific period. The top point and endpoint of the candlestick represent the high and low prices of the asset respectfully, while the middle part between the main body and the top/endpoint indicates the opening and closing prices. The larger block or body in each candlestick helps to show how bullish or bearish an asset is. For instance, if the larger block is colored in black/red, it shows that the asset closed at the lower price. When it is white/green, it shows that the asset closed at a higher price.
Why Should I Know How to Read Forex Charts?
There are many reasons why traders use forex charting programs while trading. For one, it can be used to predict future price movements and determine the existence of trends when combined with other technical analysis tools. Plus, since the price of assets can change at any time, especially for assets that have high volatility, forex charts help traders to determine the level of risk involved in trading a particular currency pair and enables them to come up with strategies that will protect their trades from future losses.
In addition, determining price movements through tables, calculations, and numbers can be a bit challenging. It is also a time-consuming process because a trader would have to spend a considerable amount of time going through the figures to get a full understanding of the profitability of a currency pair; this task is made easier by forex charts. Regardless of the chart, you use while trading, it cannot be denied that the visualization that these charts provide allows traders to understand price movements better, and they are relatively easy to use as well.
How to Read a Forex Line Chart
Forex line charts help to filter market noise, and their simplicity allows traders to determine support and resistance levels based on the price patterns. Here’s how you can read a line chart:
1. Choose your Currency Pair
Although line charts do not show as much information as the other major charts, they do show the overall relationship between two currencies by connecting different closing prices. You can check the major currency pairs like USD/EUR or select any pair you want to trade.
After selecting a currency pair, set the specific time period you want to examine. Since line charts are good for determining trends, you may want to choose a period that gives you an idea of the bigger pictures and allows you to analyze large-scale patterns.
2. Check for different prices
While most line charts only display the closing price of currency pairs, some can allow you to see the opening, high, and low prices of those assets. If your trading platforms provide you with that opportunity, choose the price you wish to see or open different line charts to compare the different prices.
3. Use Trend Lines
As the name implies, a trend line is a visual representation showing the support or resistance for an upward or downward trend; they connect points that define the trend. Unlike other charts where you have to worry about where to draw the line (for instance, in a candlestick chart, you have to determine whether to draw the trend line at the closing price or opening price of the candle), this problem doesn’t arise inline charts.
All you have to do in the case of a line chart is to connect three or more of the highest closing price points for the support line and connect three or more of the lowest price points to show the resistance line.
Once these points are connected, a trader can easily see which direction the currency pair is heading, and a trader can buy or sell depending on the direction of the trend.
4. Look for Chart Patterns
Chart patterns are shapes that inform a trader of a potential trend reversal or the start of a new trend; forex line charts are great for visualizing chart patterns. For instance, an ascending and descending triangle typically indicates that there will be a continuation in the underlying trend. Also, a heads and shoulders pattern shows a possible reversal of the underlying trend.
A simple line chart is easy to understand and implement, but they do have their downsides. For instance, you can’t test your trading strategies with a line chart, and trading with only line charts in real-time can be a bit challenging.
However, since line charts do not provide full information about the price behavior of an asset, it is important to combine it with other technical analysis tools to get accurate trading information and execute successful trades.